ECONOMIC SECURITY

At the heart of Sri Lanka’s financial district stands a pivotal institution that is intent on driving economic vitality – the Colombo Stock Exchange (CSE). As a cornerstone of the nation’s economic framework, the CSE not only facilitates investment but also shapes the trajectory of corporate growth and prosperity.

And at the helm of this influential institution is its Chairman Dilshan Wirasekara, whose leadership is guiding the CSE to new frontiers of success and innovation. With a profound grasp of market dynamics and an unwavering commitment to fostering economic resilience, he says he’s dedicated to cementing the role of the bourse in driving the country’s economy.

Bringing 28 years of multifaceted expertise in banking, treasury, investment management, insurance, capital market strategy and corporate finance advisory, Wirasekara assumed the role of Chairman of the CSE in June 2022.

His tenure has been marked by the execution of critical debt restructuring agreements with international development financial institutions and establishment of strategic partnerships with foreign entities that have an interest in emerging markets such as Sri Lanka.

In addition to his role at the stock exchange, Wirasekara serves as the Managing Director and Chief Executive Officer of First Capital Holdings.

An alumnus of INSEAD, Wirasekara says his leadership philosophy is grounded in integrity, innovation and sustainable growth.

– Compiled by Tamara Rebeira

“A newly elected leader with a five year term is likely to provide a sense of stability”

Dilshan Wirasekara

BACKGROUND

BIRTHDAY
14 May

FAMILY
Wife – Lochani
Children – Dhiren, Siyara, Ramika, Gishen and Lola (dog)

EDUCATION
Mahanama College
INSEAD
The Association for Overseas Technical Cooperation and Sustainable Partnerships (AOTS)

HOBBIES
Travelling
Watching movies
Karaoke

I foresee a normalisation of our financial situation to pre-crisis levels within a couple of years

Q: Sri Lanka announced the finalisation of debt restructuring agreements with major bilateral creditors at the end of June. How do you view the impact of this on the market, and investor and business confidence, going forward? And how important is it that this process is completed with our bondholders too?

A: This is a major breakthrough in finalising agreements with bilateral creditors.

Following numerous rounds of discussions and signing MOUs, Sri Lanka has formalised legal agreements. This completes the restructuring of bilateral credit with both the Paris Club and China among others.

Prior to this, we completed the domestic debt optimisation (DDO) programme.

With the bilateral restructuring completed, the only remaining task is to address commercial creditors – specifically international sovereign bondholders. Sri Lanka has reached an agreement in principle with these bondholders, marking the first step in restructuring commercial debt.

While finalising these agreements will likely take several more months, we are 80-90 percent through the entire debt restructuring process. And Sri Lanka expects to sign agreements with commercial creditors within this time frame. The terms announced in July are comparable to other restructured debt, and conform with the IMF road map and criteria.

We anticipate completing the entire debt restructuring process prior to the end of the year, which is a significant milestone. This achievement will require the country to begin servicing the restructured debt.

At present, we’re at a standstill on debt servicing; yet, once restructured, Sri Lanka will adhere to the new agreements. Most of these agreements include a grace period until 2027-28, during which we will only service interest with capital repayments commencing thereafter.

This progress has brought Sri Lanka closer to debt sustainability – and a key outcome of this process will be to upgrade our restricted default status (RD), leading to an improved country rating.

Upon finalising agreements with commercial creditors, we can expect a country rating upgrade by at least one or two notches.

This in turn will restore Sri Lanka’s access to international capital markets, attracting investment flows that have been absent since our default some two years ago. This will be transformative for our stock exchange, bond market and foreign direct investments (FDI).

Restored access to international capital markets will enable us to finance the government’s growth initiatives including Port City Colombo development projects that currently lack international funding.

I foresee a normalisation of our financial situation to pre-crisis levels within a couple of years.

Q: Earlier this year, you stated that the outlook for the Colombo Stock Exchange (CSE) for 2024 seems to be positive. How do you view the progress made so far – especially in attracting both local and foreign direct investments?

A: My initial prediction has proven to be somewhat accurate – the market rallied nearly 16 percent in early June. However, July saw a decline with the All Share Price Index (ASPI) falling below 12,000.

The market shored up by 12 percent in the first half of 2024, which is impressive for a six month period. If this is annualised, we’re looking at close to a 25 percent return, which is excellent compared to fixed income returns – currently around 10 percent.

Regarding my outlook, I believe the prediction is partly accurate. And I remain bullish about the market’s potential for further growth. The benefits of the re-rating or debt restructuring will be fully realised in due course.

The primary reason for this is the uncertainty surrounding the upcoming election, which is to be held on 21 September. I anticipate the market will rally once we overcome the election hurdle, reflecting my initial optimism for a strong year.

Meanwhile, investor dynamics are heavily driven by domestic players.

Historically, the CSE’s turnover has been balanced with foreign and domestic investors contributing equal shares. This equilibrium persisted until 2019 and was similarly observed 10-15 years ago, reflecting a longstanding average.

Following the Easter Sunday bombings, COVID-19 and economic crisis, foreign investor sentiment plummeted, resulting in only five percent of the market turnover being foreign dominated with domestic investors accounting for 95 percent – this trend has persisted for the past four years.

This year however, we are seeing a shift with foreign investors accounting for 15 percent of turnover and domestic investors 85 percent. I believe it is only a matter of time before we return to the 50-50 ratio that was the historical norm.

Completion of the debt restructuring process and resolution of election uncertainties will likely result in increased foreign participation, leading to a more vibrant market. Although foreign participation remains insufficient, I’m confident that following the debt restructuring and election, we will see significant improvement and market normalisation.

SRI LANKA TODAY

STRENGTHS
Resilience
Diversity
Natural beauty

WEAKNESSES
Political culture
Public transportation
Foreign direct investment

OPPORTUNITIES
Positioning Sri Lanka as a regional financial hub
Fast tracking growth and reaching developed country status by 2045
Positioning Sri Lanka as a most sought-after tourist destination with over 10 million visitors annually

THREATS
Political uncertainty
Deviation from reforms – including the IMF path
Corruption

I anticipate the market will rally once we overcome the election hurdle, reflecting my initial optimism for a strong year

Q: What are the key sectors or industries that you believe offer the most promising investment opportunities given the current economic climate?

A: It’s important to recognise that we’re emerging from two years of economic contraction – and entering our first year of growth, following the pandemic and economic crisis. In 2023, the economy contracted by approximately three percent; and in 2022, by nearly eight percent. These were substantial declines.

However, we have seen robust growth in the last two quarters. For instance, the first quarter of 2024 recorded about five percent growth. I anticipate this growth will continue throughout the remaining quarters as the domestic eco­nomy normalises.

As the economy recovers, companies will experience growth and garner higher profits. Increased economic activity and consumer spending will likely be reflected in the earnings of listed companies, as their performance tends to mirror the broader economy.

Several sectors are poised to benefit from this recovery and my favourite is the banking sector as banking stocks are currently undervalued.

Our market multiples are slightly below a book value of one and price-earnings multiple of about nine based on trailing earnings. In contrast, banking sector multiples are half the overall market, trading at less than half the book value and around four to five times the price-earnings multiple.

The sector stands out for its potential upside. As the economy normalises, banks typically benefit from increased borrowing and business activity, leading to higher transaction volumes and profitability.

Additionally, many banks have over-provided for their international sovereign bond (ISB) exposures. With the finalisation of ISB restructuring, which involves an implied 28 percent haircut and four different instruments, certain banks will likely write back these excess provisions.

This potential once-off gain could substantially boost their bottom lines this financial year, which isn’t anticipated by the market as yet.

Alongside banking, I’m also optimistic about the tourism industry. With tourism normalising, we expect around 2.3 million tourists this year, having already surpassed the one million mark. The tourism and hospitality sectors should benefit from this resurgence.

Manufacturing is another sector that’s poised for growth due to increased consumption related activities. As people start consuming more, sectors ranging from fast-moving consumer goods (FMCG) to other manufacturing areas are likely to see gains.

And finally, the export sector – particularly apparel exports – is rebounding significantly. Industry insiders are bullish about the outlook for 2024, making export-oriented companies another area of interest.

Q: With the upcoming election, the importance of investor confidence is being emphasised in corporate circles. What are the potential economic impacts or sensitivities that investors should consider? And how does the CSE view political stabi­lity – or the lack thereof – and its influence on market dynamics?

A: Uncertainty – be it political or otherwise – generally hampers market activity. Investors tend to be cautious when faced with unknowns, preferring to stay out of the market until the uncertainties are resolved.

This reluctance is understandable and something that markets must navigate.

Regarding the current political landscape and with three main presidential candidates emerging, polls suggest that there isn’t a clear frontrunner, which adds to the uncertainty.

However, once the election is held and a clear winner is established, investor confidence is expected to return. A newly elected leader with a five year term is likely to provide a sense of stability, encouraging investors to reassess and invest in the market.

Despite the political rhetoric, I believe that the core policies will remain largely consistent in the election aftermath. The IMF reform programme, which we are committed to, is a critical path that cannot be easily altered.

Political leaders may propose changes or renegotiation, yet deviating from this programme is unlikely to be feasible. The International Monetary Fund would likely withdraw support if there are significant shifts, potentially plunging us back into a crisis similar to that of 2022 with another aragalaya.

Politicians are aware of the public’s response to economic missteps – and are unlikely to risk instability. Therefore, I am not overly concerned about the election outcome. Regardless of who emerges victorious, adherence to the current reform path seems inevitable.

Once this hurdle is cleared, we can expect the market to rebound, attracting FDIs and stimulating economic activity, leading to a much needed bull run.

FAST FORWARD 10 YEARS

SRI LANKA
A higher middle income country with a GDP of US$ 120 billion
The most beautiful country in the world to live in

ASIAN REGION
The example of change achieving prosperity through corruption reform

Q: What implications do you think the IPO drought and a few high profile delistings in recent times have for the CSE and its stakeholders? Is there a strategy to counter any negative impacts arising as a result of this?

A: This has posed a challenge as many large corporations have opted to delist for various reasons, primarily because they don’t foresee the need to access capital markets to raise funds.

The purpose of listing on an exchange is to unlock the value of your company or access public capital. However, some companies no longer see the merits of being listed. For example, Expolanka Holdings and Nestlé both delisted recently.

Nestlé, a multinational company, decided at a global policy level that it doesn’t want its subsidiary companies listed on exchanges in different geographies. Being a large Swiss based company, Nestlé doesn’t see the need to raise capital through the CSE for its growth.

Similarly for Expolanka, 90 percent of its shares are held by a single controlling shareholder with a small public holding and no intention of raising further capital for growth.

Listing also comes with compliance requirements including proper governance frameworks and adherence to listing rules, which some companies find burdensome compared to the benefits of being listed. This compliance versus benefit analysis often leads companies to delist – a challenge that is difficult for us to counter from a stock exchange point of view.

Despite these challenges, we’re focussing on what is within our control to help companies unlock value, create wealth and access funding through the listing process.

To accommodate different types of entities, the CSE has four boards: the Main Board for large caps, Diri Savi Board for medium caps, Empower Board for SMEs – which we are actively promoting – and Catalyst Board for state-owned enterprises (SOEs)

The Catalyst Board was developed in collaboration with the government’s State-Owned Enterprise Restructuring Unit (SRU) and the regulator – the Securities and Exchange Commission of Sri Lanka (SEC) – to facilitate the transition of SOEs to the main board.

Additionally, the Catalyst Board is designed to assist SOEs that lack the compliance requirements for the Main Board, enabling them to transition gradually.

With the government moving ahead with the divestiture of SOEs such as Lanka Hospitals, Sri Lanka Insurance (SLIC), Sri Lanka Telecom (SLT) and Litro, the CSE’s infrastructure can support these transactions as well as divesting minority stakes in the two largest state-owned banks, potentially increasing market capitalisation and liquidity.

We are particularly keen on promoting SME listings because many of these businesses rely too heavily on traditional financial systems and banks to raise money. The Colombo Stock Exchange offers a cheaper source of funding through share capital, which is essentially zero cost compared to interest bearing loans. And many SMEs could benefit from listing.

Our goal is to make the stock exchange accessible to everyone, not only a privileged few. Currently, there are around 40,000 active accounts trading on the market at least once a month, though the potential is much higher. To address this, we’re focussing on investor education and financial literacy, by means of grassroots initiatives such as pocket meetings and seminars.

One significant strategy is covering capital markets in the school curriculum. Many students graduate without a basic understanding of the stock market, which deters them from investing in it. By integrating capital market education into schools, we hope to cultivate a new generation of investors.

Regarding the IPO route, it’s a chicken and egg situation. Companies are reluctant to list when the market doesn’t reflect their true value especially when trading at half the book value. However, as the market re-rates, IPOs will start flowing.

We’ve already had two IPOs this year and expect to end the year with five or six new listings. By addressing these issues and implementing certain strategies, we aim to overcome the challenges posed by delistings, and foster a more vibrant and inclusive market.

CORPORATE GOVERNANCE

Q: How does the CSE define and promote best practices in corporate governance among listed companies?

A: By implementing the corporate governance code and embracing best practices. In doing so, we can establish a framework where companies are compelled to adhere to stringent standards. This approach fosters governance and ensures that compliance becomes intrinsic to operations.

Completion of the debt restructuring process and resolution of election uncertainties will likely result in increased foreign participation, leading to a more vibrant market

GLOBAL RISK MANAGEMENT

Q: What strategies does the CSE employ to mitigate risks associated with global economic volatility while maintaining market integrity?

A: By leveraging cutting-edge technology and expanding our product offering – including diversification into fixed income and sustainable bonds, and introducing innovations like short selling – we aim to transform our market from a single product focus on equities.

This broadening of our product suite provides investors with diverse options, ensuring that they have alternatives to navigate market fluctuations and global volatility effectively.

Several sectors are poised to benefit from this recovery and my favourite is the banking sector as banking stocks are currently undervalued

Q: On a separate note, what strategies do you believe the private sector can adopt to help reduce corruption in Sri Lanka? And who, in your opinion, should take the lead?

A: It’s crucial for all Sri Lankans to take responsibility to address these issues and not only the corporate sector or CSE. Therefore, promoting good governance frameworks is essential. Proper governance frameworks are fundamental to tackle corruption.

If the exchange and regulator – i.e. the Securities and Exchange Commission – advocate for robust governance structures among listed companies, it becomes challenging for corrupt activities to persist. The Colombo Stock Exchange is committed to driving this change by establishing such frameworks.

We now have a new corporate governance code introduced by the SEC, which imposes stringent rules for listed companies to follow. For the first time, the SEC Act includes punitive measures that are severe, allowing the regulator to impose fines and even prison sentences.

This puts a significant onus on the boards of listed companies to ensure that they have the proper governance frameworks in place, effectively addressing corruption.

Addressing corruption at the government and policy levels is equally important, as it has hindered Sri Lanka’s growth. Corruption exists at every level in the country and I believe that if we address it as individuals, and collectively implement stringent systems and processes, we can change this culture.

Transforming the economic landscape into a digital economy will also play a crucial role. Much of the corruption thrives in manual paper based systems. Digitalising the economy, from banking transactions to bureaucratic processes, will make it more challenging for corrupt activities to occur.

Moreover, it’s common knowledge that most bribes and underhand transactions take place in the form of cash rather than through bank transfers. By digitalising every aspect of the eco­nomy, corruption can be reduced significantly.

The Colombo Stock Exchange is taking steps in this direction and shares are now traded in electronic form, making the system script-less. We have moved from a T+3 (trade date plus three days) to a T+2 (trade date plus two days) settlement cycle, and we’re planning to implement a central counterparty settlement system to mitigate the risk between the buyer and seller.

Similar digitalisation efforts at government and ministry levels will further address corruption. Combining these efforts will help reduce corruption, if not completely eliminate it, in Sri Lanka.

CRISIS PREPAREDNESS

Q: Following COVID-19 and the economic crisis, what contingency plans does the CSE have in place to address financial crises or market disruptions in the future?

A: Business continuity plans are constantly updated and upgraded to deal with evolving future risks. These plans are regularly updated and enhanced at the CSE to anticipate and mitigate evolving risks.

This document undergoes annual reviews to ensure that it addresses various potential threats, be they IT related, political or other unforeseen challenges. It outlines procedures for maintaining operations during disruptions, ensuring continuity in exchange functions even under adverse circumstances.

Q: How do you view the current tax regime, and its impact on businesses and the people in general? And likewise, are you in favour of the proposed wealth tax, which is to be linked to property ownership?

A: The current tax rates in the country are undoubtedly high but necessary.

Corporate tax is at 30 percent, financial services or VAT at 18 percent, the social security levy at 2.5 percent and the highest bracket of pay as you earn (PAYE) tax at 36 percent. For a financial services firm, this results in an effective tax rate exceeding 50 percent, considering the compound effects.

While these rates are high, it’s worth noting that other countries such as Australia have personal income tax rates in excess of 50 percent and therefore, we aren’t the worst in terms of taxation.

Sri Lankans aren’t accustomed to paying taxes and this is part of the problem. There isn’t a strong tax paying culture and many feel that they shouldn’t have to pay taxes. This sentiment is partly due to not seeing tangible benefits from tax contri­butions.

In developed countries, public transport, roads and utilities are world-class, and taxpayers witness the value of their contributions. In Sri Lanka, while we offer free healthcare and education, the benefits are mainly for the marginalised sections of society while the more privileged – who pay the taxes – don’t always use these services.

We need to broaden the tax base as opposed to merely reducing tax rates. The wealthy should be taxed more and the poorer less, which is a fair principle – and compliance and acceptance of paying taxes must improve. We’ve made progress with over a million tax files opened, yet we need every Sri Lankan to pay his or her fair share of taxes in line with their earnings.

I support the idea of a wealth tax because disproportionately taxing the wealthy is fair. However, this should be introduced alongside efforts to increase the tax net and not as a standalone measure.

A wealth tax can contribute to higher direct taxation, which could enable the government to reduce indirect taxes such as VAT, benefitting the average citizen. Increasing direct taxation will support this shift.

With tourism normalising, we expect around 2.3 million tourists this year, having already surpassed the one million mark. The tourism and hospitality sectors should benefit from this resurgence

Q: What are the pros and cons of Sri Lanka’s engagement with the IMF and Extended Fund Facility (EFF)? Are you concerned about its sustainability in the aftermath of the forthcoming election?

A: Completing the EFF is essential for Sri Lanka – looking back, the country has initiated 17 IMF packages since independence with only one completed successfully. The track record of terminating these programmes prematurely is a concern.

However, I am optimistic that this time we’ll see it through to fruition and reap its full benefits.

This is crucial for us to emerge from existing challenges and implement much needed reforms sustainably. Without completing the EFF, I see no viable alternative to achieve these objectives and we must strive to make it a success.

Despite the political rhetoric, I believe that the core policies will remain largely consistent in the election aftermath. The IMF reform programme, which we are committed to, is a critical path that cannot be easily altered

Q: And finally, how would you describe or assess Sri Lanka’s ‘election year economy’ – including key sensitivities?

A: The upcoming election will likely temper the full potential of our economy for the time being. Historically, election years often lead to cautiousness among businesses and investors, resulting in lower turnover at the CSE and subdued sentiment.

This cautious sentiment is prevalent at this time, despite strong underlying fundamentals that suggest the market should be performing better.

Interestingly in past election years, we’ve seen government spending aimed at boosting disposable incomes through salary hikes and tax cuts, which traditionally stimulated artificial growth spurts.

This year however, such fiscal measures are not feasible due to financial constraints. Therefore, we anticipate a period of subdued economic activity leading up to the election. Nonetheless, I’m optimistic about the economic outlook.

Even with the election this year, I foresee an economic growth rate of three to four percent, possibly even approaching the five percent mark. This level of growth, while moderated by election related uncertainties, still represents a positive trajectory for Sri Lanka’s economic recovery.

So I’m not worried that the economy is going to suffer as a result of elections.